Pricing N ikkei 225 Options Using Realized Volatility

This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non‐trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X ) and HAR(X ) models. The main results using put options on the N ikkei 225 index are that: (i) the ARFIMAX model performs best; (ii) the H ansen and L unde (2005a) adjustment for non‐trading hours improves the performance; (iii) methods for reducing microstructure noise‐induced bias yield better performance, while if the H ansen– L unde adjustment is used, the other methods are not necessarily needed; and (iv) the performance is unaffected by removing large jumps from realized volatility.